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Category Archives: Tyler Craig
June 5, 2013Posted by on
Japan’s stock market has been an impressive sight to behold. In response to massive stimulus efforts the Nikkei 225 Stock Index (Japan’s equivalent to our Dow Jones or S&P 500 Index) staged its largest six-month rally ever. Year-to-date the Nikkei was up over 50% at its peak. And yet, the unsustainability of such a breathtaking ascent has come home to roost.
Over the past two weeks the Japanese market has cratered almost 20%. Remember a 20% peak to trough decline is Wall Street’s widely accepted definition of a “bear market”. What’s so interesting about the recent downturn is that despite its magnitude, the longer-term uptrend of Japan’s market remains intact.
Let’s head to the charts to see if we can spot potential support levels where the current pullback may terminate. I’m going to use one of the more popular ETFs designed to track Japan – the WisdomTree Japan Hedged Equity Fund (DXJ).
The $43 zone marked the high of the trading range DXJ formed between 2009 and late-2012. The technical analysis principle of polarity states that prior resistance becomes new support. This former resistance level at $43, then, should be watched to see if it turns into support.
A second approach to identify potential support for DXJ is using Fibonnaci Retracements. The Fib Retracement tool in the MachTrader is designed to help traders spot areas where buyers or demand is likely to materialize on a chart. As shown in the chart, the 38.2%, 50%, and 61.8% retracement levels are drawn for the major price advance from $30 to $54. Though the current decline in DXJ has fallen below the 38.2% retracement at $44.82, another key level looms closely around $42.
In order for the weekly uptrend in Japan to remain in force and the case for a true breakout from its multi-year trading range to remain valid, DXJ needs to hold above the $42 to $43 zone.
Tyler Craig, CMT
Rich Dad Education Instructor
May 30, 2013Posted by on
This week ushered in a spate of positive economic data including news that home prices rose 10.9 percent year over year – the largest such gain since 2006, and news that Consumer Confidence has risen to its highest levels since the current bull market kicked off in early 2009.
Continued signs of economic improvement like these should help the ongoing rebound in cyclical stocks highlighted in A Cyclical Rotation is Afoot earlier this month. Interestingly, it’s not housing stocks that are leading the charge higher this week, but rather another economically sensitive sector – autos.
The Dow Jones Automobile Index ($DJUSAU) has been on fire over the past six months and is approaching a pivotal multi-year resistance level. In fact, the resistance zone highlighted by the dotted black line is actually the neckline for a long-term inversed head and shoulders pattern that has formed over the past few years. A successful breakout above this level would be very bullish and signal a completion of the bottoming pattern. Quite the recovery given that many auto stocks were left for dead after the 2008 crash, no?
As shown in the bottom panel of the accompanying chart, the Automobile Index began outperforming the broader market late last year and has continued its leadership role ever since.
If we wanted to search for trade ideas within the emerging sector we could assess the price charts of individual automakers like General Motors (GM), Ford (F), and Toyota (TM). Let’s zero-in on the chart of Ford for brief analysis.
Like the auto index, the uptrend in Ford has accelerated in momentum over the past month. In the short run it does appear a bit extended and in need of a pullback or some consolidation though. The multiple high volume up days over the past few weeks adds further appeal to the bullish case as it indicates potential institutional buying.
May 24, 2013Posted by on
One of the more popular avenues used by traders to discover trade ideas is top down analysis. Consider it a multi-step process that begins on a broad level and gets progressively more specific with each step. Here’s the gist of the approach:
- Assess the broad market
- Find the best sector
- Find the best stock within that sector
This is a tried and true method we come back to time and again in our weekly trading labs to identify potential trading opportunities. Allow me to illustrate using current market conditions.
We begin by taking a brief look at the S&P 500 Index to determine the overall trend and any price patterns that are developing. As shown in the S&P 500 ETF chart below, we are in an uptrend with a three day pullback to a rising 20-day moving average.
Next, we dig a bit deeper by assessing the nine major market sectors to see which one is in the strongest uptrend and offering the best trading opportunity. If you haven’t yet built a watch list for sectors in your MachTrader quote sheet, you can import the full list by right clicking in the quote sheet, selecting “import symbols”, and then finding the list that says “sector spdrs”. This will automatically input all the relevant exchange traded funds for the nine major sectors. We could go through the charts of each sector one by one to determine which one has the best setup.
An alternate approach would be using the powerful sector rotation tool available under the tools menu (Tools>Broad Markets>Sector Rotation: Sector SPDR Perfchart). The graphic below shows the performance of each sector relative to the S&P 500 Index over the past month. While utilities have been the worst performer, energy has been the best.
A cursory glance at the energy sector chart (XLE) reveals it’s in a clean uptrend with a four-day pullback.
The final step consists of drilling down into the energy sector to identify an individual stock that’s providing a compelling entry point. Fortunately, the MachTrader makes this part a cinch. You can import all the energy stocks that comprise the Energy Sector Fund (XLE) in the quote sheet by right clicking, selecting “import symbols”, and finding the list that’s titled “XLE”. Once the ticker symbols are input to your quote sheet you can go through the stocks one-by-one to determine which one looks best.
One of the better looking setups in the energy space is Tesoro Corp (TSO). Since staging a high volume breakout it’s formed an orderly low volume pullback providing a textbook bull retracement pattern.
There’s no need to struggle finding trade ideas or to spend hours each night pouring through hundreds of charts. If you’re equipped with the right tools and the right knowledge it’s a piece of cake.
May 21, 2013Posted by on
With the market making new all-time highs seemingly every day, one can’t help but take a step back to view the wonder of it all. This year’s relentless rise stands in stark contrast to the dark days of ’08 when blood was flowing in the streets and fear gripped the hearts of the everyday investor. It goes to show just how far the market pendulum can swing in both directions.
According to a recent Barron’s article, we’ve now gone 183 days without a 5% correction which is far longer than average. As outlined in our blog post on market corrections, a decline of 5% should occur three times a year on average which is about once every 84 days. While the futility of top picking or the importance of sticking with the trend would be appropriate topics in light of current market conditions, let’s instead explore how to better fulfill the ultimate objective of all traders:
Maximize Gains and Minimize Losses
Since the market gods have been gifting stock owners of all stripes with insta-gains of late, let’s focus on the former part of this dual mandate – the maximizing of profits. While it’s possible to capture some of the gains during a stock’s ascent, it is highly unlikely that you’ll be able to ride it all the way to the top of its eventual peak. And yet, your long-term success necessitates capturing the occasional big winner. These scattered home runs will offset the inevitable losses that will attempt to stymie your progress.
One favorite technique for maximizing gains is the simple act of taking partial profits along the way. Rather than exiting your entire position all at once – which offers only ONE chance to pick the top – exiting in stages offers multiple chances to ride a trend to its end.
Scaling out also offers a nice compromise between the fear of giving back your gains and the fear of missing out on additional profits. Consider it an emotionally appealing alternative to staying all in or getting all out which also sets up a potential win-win scenario. If you sell ½ your position and the stock continues to rise you’ll be happy you only sold half. If you sell ½ your position and the stock drops aggressively you’ll be happy you at least sold half.
You can maximize the effectiveness of your timing when taking partial profits by using support and resistance levels as well as other technical analysis tools. If you’ve yet to experiment with scaling out, consider this your kick-start. If you need help with the timing and details of such a technique come join us for our weekly trading labs.
May 9, 2013Posted by on
One by one the few remaining bearish arguments for the market are being snuffed out. With the Russell 2000 Index ($RUT) soaring to new all-time highs its recent signs of distribution and its development of a potential intermediate top have been negated. High beta stocks have picked up the torch and started leading again. Beaten down commodities are being resurrected. Even areas that year-to-date have been unable to muster any kind of sustainable rally (e.g. Emerging Markets [EEM] and China [FXI]) have finally climbed out of the abyss. And what of seasonality? So far it’s been powerless in stopping the runaway bull train.
We’re getting to the point where the only item the bears can cite as potentially ominous for the market is the fact that it’s overbought – and that’s a tenuous argument at best.
Perhaps one of the most impressive developments over the past two weeks has been the change in sector leadership. During the first four months of 2013 the market was led by classic dividend paying defensive sectors like utilities, health care, and consumer staples. At the same time well-known offensive sectors like technology, energy, industrials, and basic materials were lagging notably.
Well, it appears the market gods flipped the freaky Friday switch because the previously lagging sectors are now leading and the previously leading sectors are now lagging. Of course, it’s not really freaky – it’s just some good ole’ fashion rotation, and quite the bullish rotation at that. With offensive sectors now pulling ahead the market is arguably healthier than it was even during the first four months of the rally. The performance chart below (accessible in the MachTrader) shows the relative sector performance since April 22nd.
Alongside this newfound leadership the Morgan Stanley Cyclicals Index ($CYC), which consists of a few dozen stocks in economically sensitive areas of the market like autos, metals, machinery, and transports, has staged a decisive breakout. Previous to this week’s surge, the CYC was in the midst of a minor correction and was underperforming the broader market. As shown in the Comparative Relative Strength study in the bottom panel of the accompanying chart, CYC has ended its correction and become a market leader.